What Happens When You Default on Your Student Loans?


Times are tough these days, and if you can’t manage to make your student loan payments on time, your loan could go into default. Defaulting on a loan can have serious consequences for your credit score and financial health. Here’s what you need to know about this difficult financial situation.

How long does it take to default?

According to StudentAid.gov, your loan is marked as “delinquent” the day after you miss a payment. Until you pay the past-due amount on your bill or find a way to defer your payments, your loan will remain delinquent. After 90 days of delinquency, your lender will report your loan’s status to the credit-reporting bureaus, causing your credit score to suffer. If your loan remains delinquent, it may go into default. The amount of time it takes depends on the kind of student loan you have. If your loan came from the Federal Family Education Loan Program or the William D. Ford Federal Direct Loan Program, it will take 270 days of delinquency to go into default, according to StudentAid.gov. According to Experian, one of the nation’s major credit reporting agencies, private loans and federal Perkins loans are even less forgiving — they will be declared default after a single missed payment.

What happens when you default on a loan?

Defaulting on your loan will result in a massive hit to your credit score. This will severely reduce your capacity to borrow money, obtain a cell phone plan and rent a house. However, defaulting on your student loan can also have more immediate impacts on your financial situation, warns StudentAid.gov. For starters, your loan will become accelerated, meaning that you’ll owe the entire balance, plus interest, immediately. You will be forbidden from receiving additional student aid, your employer may garnish your wages and you won’t receive any federal benefits or tax refund money — it’ll go towards paying down your loan instead. Furthermore, your academic transcript may be withheld by the school, if your educational institution chooses to do so.

Was your loan mistakenly put in default?

In some cases, your loan may be mistakenly put into default. Make sure you review the facts surrounding your loan and contact your loan provider if you notice anything unusual. If you’re a part-time student, you should be covered by in-school deferment. If this is the case with your situation, StudentAid.gov recommends contacting your school’s registrar to get a record of your attendance, then contacting your loan provider to get their records straightened out. Similarly, you should get in touch with your loan provider if you were approved for forbearance or deferment, but were wrongly placed into default. It’s possible that your loan provider may have inaccurate information about your deferment or forbearance coverage. And if you’ve made your payments on time, StudentAid.gov recommends providing your lender with your proof of payment records.

Rebuilding your credit

While defaulting on your student loans can cause extensive difficulties, it’s possible to rebound from this pitfall. Experian contributor and financial writer Brianna McGurran suggests trying student loan rehabilitation for defaulted federal loans. This is a program that helps you rebuild your credit by making on-time payments over a period of 10 months. At the end of the program, you’ll be able to receive your full wages and tax return dollars. On top of that, the default status will be removed from your loan, which will aid in improving your credit.

Paying bills on schedule and keeping your credit card balances low will also help you rebuild your credit score. If you need more guidance in handling a defaulted student loan or rebuilding your credit, contact a financial advisor.

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